Bond Yield Under Various Assumptions Essay Example | Topics and Well Written Essays - 2000 words

tie down Yield Under Various Assumptions - Essay ExampleNevertheless, the concept of the price of a zero coupon bind articulated in the PowerPoint slides and the concept of the present respect are similar. One of the more heavy concepts in tie down valuation is term to maturity date. Term to maturity specifies the date or number of historic period before a bond matures (or expires) (Reilly and Brown, 2002, p. 697). Another important concept is the coupon of bond which indicates the income that the bond investor go start receive over the life (or holding period) of the issue of a bond (Reilly and Brown, 2002, p. 697). Other than concepts term to maturity and coupon of bond, the other important concepts include the principal or the par shelter of the bond just now the public is generally familiar with these concepts. II. Measures of Bond Yield Under Various Assumptions (and examples) There are at least five measures of bond give back. Each measure involves a set of assum ptions. 1. Yield to Maturity (YTM) As pointed fall out by our PowerPoint slides, Bond prices and interest prescribe risk, the yield to maturity or YTM is the yield promised to the bondholder if the bond held up to maturity and all coupons are reinvested at the promised yield (Slide 17, Bond prices and interest rate risk). ... 214-215). Fabozzi (2008, p. 214) confirmed that yield to maturity is the interest rate that will make the present value of the cash flow from a bond equal to its market price plus accrued interest. Fabozzi (2008, p. 214) pointed out that an iterative procedure is used to find the interest rate that will make the present value of the cash flows equal to the market price plus accrued interest. Following the Fabozzi (2008, p. 214) example, suppose a bond with a face value of $100 promising payments of 7% per annum payable semi-annually or every vi months is being sold at $94.17. Based on the parameters defined for the bond, the bond will earn for the bond empt or the value of $3.50 every six months plus $100 at the end of the eight year. Fabozzi (2008, p. 214) pointed out that when the rabbet rate used to obtain the present value of the payments from the bond is 3.5%, the present value of the bond is $100.00. When the force out rate of 3.6% is used to determine the present value of payments from bond, the present value of the bond is $98.80. When the discount rate of 3.7% is used, the present value of the bond is $97.62. When the discount rate of 3.8% is used, the present value of the bond is $96.45. When the discount rate of 3.9% is used, the present value of the bond is $95.30. Finally, when the discount rate of 4.0% is used, the present value of the bond is $94.17. Thus, ground on these, Fabozzi (2008, p. 214) concluded that 4.0% is the price of the bond and hence, 4.0% is the semi-annual yield to maturity. All computations came from Fabozzi (2008). Thus, we can consider that the yield to maturity or YTM of the bond as the interest actually paid to the investment of $94.17 made by the buyer of bond and the cash flows of $3.50